Uganda: Why Umeme Contract Will Not Be Terminated

Although Parliament has demanded that the government cancels the contract of power distributor Umeme, all indications are that this is unlikely to happen.

On paper, Umeme's case looks bad, a contract clearly skewed against the government, and, by extension, the people, of Uganda. But the practical realities are that cancellation would not get the government out of the hole it is in.

First, cancelling the contract would be self-incriminating evidence that government signed a bad deal. But it would also send a frightening message to investors, a point made last weekend by William Kalema, the country managing director of BDO East Africa, which provides business advisory services.

"Cancelling a contract has serious ramifications for inward investments," Kalema said on the Capital Gang radio show. "It is possible to improve the contract, but to repudiate it would bring grave concerns. How many credible investors would want to come to a country that has just cancelled a contract of a company?"

On the same show, Umeme Managing Director Charles Chapman said what the MPs had recommended was akin to "throwing the baby out" with the bath water: "we all agree things aren't perfect. But we all agree that things are getting better."

Kicking out Umeme would set the stage for another long process of seeking an investor to take over power distribution, something that could take more than a year. A short-term measure as government seeks another investor to carry the burden of power distribution is not yet publicly known.

Energy Minister Irene Muloni declined to go into detail over the matter, saying she was still preoccupied on a campaign trail in Bubulo East, where a by-election is to be held tomorrow.

"Government will sit, discuss and agree on the way forward. This is not a day's job," the minister said.

She did not say when government would discuss Parliament's recommendations. On the Capital radio show, however, Ofwono Opondo, the executive director of government's media centre, and the government spokesperson, made it clear that the government was "not considering cancelling the contract."

Cancelling the contract would likely anger the World Bank, a huge donor for the country. In November last year, the World Bank and other banks gave Umeme $190m to implement its investment plan. Then there is the messy issue of compensating people who bought shares in Umeme when the company was listed on the Uganda Securities Exchange in November 2012. This would be unprecedented on Uganda's stock market and could hurt the image of the market.

Just before Parliament came out with its recommendations, Umeme released its financial performance for 2013, where the company's earnings per share went up 47 per cent to Shs 51.54. The company declared a final dividend of Shs 16.8 per share.

If government decided to cancel the contract, it would have to go after the officials who signed the agreement in the first place, which could pose some political risks. The MPs blamed government officials such as David Ssebabi of the Privatisation Unit; Fred Kabagambe-Kaliisa, the permanent secretary in the ministry of Energy; Minister Kamanda Bataringaya, and the attorney general's office for what they felt was a terrible deal.

A former top official of Electricity Regulatory Authority believes the best the government can do is to renegotiate the contract.

"It is easy to assume that people are dying to come to Uganda [to invest in the energy sector]. That's not true. People have floated tenders and nobody turned up," he said.

There is no doubt that Umeme, the power utility firm, continues to retain a love-hate relationship with the public, especially over its quality of service. Rampant power cuts and falsified bills have not made any matters easier for the firm, whose contract has been the subject of debate for close to three years.

Most MPs of the Ad hoc committee on Energy felt that Umeme benefitted from a dubious process in 2004.

"Of great concern to the committee was the manner in which the power distribution concessionaire was procured and the outrageous terms and conditions of the agreements signed between GOU and Umeme," the committee wrote in its report.

It added: "The soft targets set for Umeme Ltd notwithstanding, the committee found out that because of the peripheral role played by the [attorney general] in the drafting of the power concession agreements, their terms and conditions were skewed to favour Umeme at the expense of government and the people of Uganda as evidenced by the scandalous provisions..."

The committee took particular issue with Paul Mare, the former managing director of Umeme, who was charged with advising government on how to go about the unbundling of Uganda Electricity Board into three separate entities for efficiency in the sector.

"Given the employment record of Mr Paul Mare who held senior positions in UEB, Eskom and Umeme, it is clearly evident that he covertly worked for and served the interests of Eskom and Umeme Ltd and therefore the information he provided on energy losses before the unbundling of UEB did not reflect the actual status at the time," the committee wrote.

For that, and much more, the committee feels that "Due to the gross legalities and manipulations encountered surrounding the procurement of the Umeme concession and the scandalous provisions of these power distribution agreements signed between government of Uganda and Umeme limited, this contract should be terminated."

Cancelling the contract would have immediate financial implications. Government will pay Umeme un-depreciated money that the firm has failed to recover. Also, Umeme will walk away with huge amounts of cash if it decided to leave. It is likely that the company could walk away with more money than it has invested, according to the contract the MPs scrutinised.

The whole process of terminating the contract could turn out to be burdensome, especially if Umeme decided to take the matter to a court of arbitration outside Uganda's borders. The contract provides that opportunity should the dispute be worth more than $7m.

Chapman said very many MPs had not read the report fully. In any case, he added, this report, dated September 2011 to October 2012 is "out of date" since there have been new developments. Chapman said since Bujagali came on line, Umeme had significantly improved its services.

Although Parliament was aware of the cost implications of cancelling the Umeme contract, MPs argued that the country would lose even more money if Umeme stayed. The government, it seems, has to choose whether to create an immediate costly crisis, or to slowly pay the long-term cost of signing a bad contract. For now, it seems inclined towards the latter, which leaves Umeme in a safe, powerful position.

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